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Finances of Mass Destruction: is the End in Sight?

At first glance, it would seem speculators are having a field day. Their Glory Age started two years ago. After betting against the American real estate market and successfully shooting mortgages down in flames, sovereign debt is now under attack. First in Dubai, next in Greece, then Portugal, Spain and why not Italy? When it happened in Dubai, we all felt rather removed from it (after all, it was the Middle East and in any case the Arabs are flooded in ill-earned petro-dollars, right?). Now that the problem has reached the shores of Europe, it's a little too close to home for comfort.

Well, what are the speculators really up to this time?

It would appear that the national rate of savings (rather than ratios like debt to GDP) is the key indicator speculators look at. The reasoning is very simple. If a country saves too little, it means it can't keep up with payments on its national debt - because the only way to pay back creditors is through taxation. And when a country is poor and getting poorer because of the Great Recession, there's little income to tax. It's a downward spiral. Hence the attack on so-called "sovereign debt".

That's the latest and most worrying effect of the Great Recession. If you read the newspapers, as usual the news are dire and dismal. One wonders why Greece and Portugal would ever want to stay in the Euro. Pundits predict that the austerity measures imposed on them by Brussels and its Euro partners (and among them Germany is unpleasantly vocal) are likely to prolong the recession. Countries caught in this particular trap are going to find it nearly impossible to climb out and get back into a healthy growth cycle.

Are speculators going to enjoy full impunity as they shoot down one country after another? It certainly looks like the odds are on their side. They have never had to pay for their misdeeds - indeed, the big bank bailouts using taxpayers' money look dangerously close to a sophisticated form of insurance against failure, opening the way to yet more misdeeds in future. After successfully wreaking havoc in international private finance, it would appear that it is the turn of public finance.

Now is that really true? Is there no hope, nothing that is going to shield us from the financial sharks?

First, their reasoning may be wrong and in the end, turn against them. Take those attacks on the Greek sovereign debt (and, eventually, other European countries with low savings rates). Ok, a first result is the weakening of the Euro. But, remember, that's just what Germany wants to help its exporters - it is a country whose growth depends on exports far more than any other in the Euro area. So renewed attacks on Greece are going to play in the hands of the Germans, insofar as it weakens the Euro. But we're in a dynamic situation. A weaker Euro also helps exporters throughout the Euro area, Greece and Portugal included. So, after all and in spite of what is said in the media, there's a silver lining in the cloud hanging over Europe: if the Euro goes down, up go exports across the board...

Second, the days of gleeful impunity for speculators may actually be reaching an end. Yesterday, 16 April 2010 - a date we should put a red circle around on our calendar- the SEC announced it was going to pursue Goldman Sachs for fraud. It charged that investors were duped into losing $US1 billion on a rigged deal pegged to dubious home loans. There's actually a great deal of public sympathy for this kind of move. The term Warren Buffett coined for derivatives was instantly a popular success. He famously described them as "financial weapons of mass destruction". Likewise, Michel Barnier, the European Commissioner for the Internal Market, is also considering tough regulations and has been repeatedly threatening to impose rules on hedge funds and curbs on bankers' pay. In Europe - probably unlike America - people are becoming increasingly irritated with the capitalist market ideology which is viewed as nothing more than an amoral money jungle.

Let's hope that the road to greater regulation of the financial world is not stopped by the likes of Sarah Palin and her irresponsible Tea Party cronies...We can't let bankers turn their banks into gambling houses. They're supposed to support economic growth, ensuring that savings are turned into constructive investments. Savings are not something to play roulette with, betting against the real estate market and sovereign debt.

In all this, what really worries me is the obvious collapse of morality across our modern society. In the rush to make money - ever more money $$$ - bankers seem to have forgotten what their banking role was all about. Artists seem to have forgotten what Art was all about. I hope that doctors still remember what medecine is about and that engineers still know how to build bridges that hold up...

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